It is never easy to predict the direction of the market. In many ways, its swings are unpredictable. However, one thing is certain. Markets fluctuate. Up and down. And there’s not much the investor can do about it. The irony is that every investor must make decisions based on forecasts. After all, this game is about buying low today in order to sell more expensive tomorrow. It is invested with an expectation. What is estimated is the future in relation to the present. Will we be better? Will we be worse?
We are not talking about the idiosyncratic investor here. This investor is definitely another kind of animal. This investor wants to change the world with his money. At heart, he is a reformer with an ethical, social or political agenda who uses his money as a weapon of change. This implies that the investment instrument that is coupled to its values is chosen. In this case, profit goes to the background. For example, let’s say we have two investment options. The first option is the most profitable. However, the company’s board of directors does not have women or its activity generates a lot of greenhouse gases. An idiosyncratic investor might choose the less profitable option for reasons other than financial.
An idiosyncratic investor is willing to lose money to further his cause. In fact, many militant bitcoiners buy BTC in a kind of crusade against state power. That’s the type of investor who says, “Price doesn’t matter.” And then he complements the expression with a libertarian phrase of some kind. This is not an article for that type of investor. This article is for the investor who invests his money to get more money. The goal is to grow financially. As simple as that.
In this context, the opportunity is financial and the risk is financial. It’s about making money or losing money. We are talking about numbers and percentages. The rest is noise. At first, only the one who risks wins or loses. In other words, he who does not risk does not win or lose. He is safe. This means that we cannot equate the loss of an opportunity with the loss of money. Suppose we do not invest in an asset that has grown explosively. We have been able to earn a lot of money. However, we did not, because we did not buy at the right time. That lost opportunity does not imply a real loss of money for our pocket. We have missed the opportunity. But we have not lost money. They are different pains. And you have to see them differently.
Now, the investor’s priority is to take care of his pocket. That means The first duty of the investor is not to decrease. The second duty is to grow. The third duty is to grow aggressively. But that order must be preserved. Which implies that we cannot sacrifice the first duty for any reason. And here we have to include both realized losses and unrealized losses. Important: We cannot lose money.
Reminder about unrealized losses: Unrealized losses are also losses. It is a mistake to treat them leniently with the excuse that we are supposed to be long-term investors. Unrealized losses are also losses in many ways. First of all, remind us that we paid dearly for an asset that is now trading at a lower price. Second, recovery takes time. And that money has been able to be used, during that same period, in more profitable options. Personally, I’d rather win 3% than lose 70%. Also, it is better for the start of the recovery to find us with cash than without it.
Now suppose we are talking about a diversified and balanced portfolio. The intention is to grow quickly in the most stable way possible. Many investors, for example, design a 60/40 portfolio. Fixed income instruments normally cover 60%. And variable income instruments cover the rest. The former provides stability and predictability. And the second brings growth and risk. It is true that variable income instruments can generate losses. But those possible losses generated by particular instruments must be able to be covered by the gains of the other instruments. Individual investment losses are inventible. The important thing is not to lose in total.
Let’s say we bought BTC at $65K with high expectations. However, things did not turn out as we anticipated. No problem. In the world of investments, those mistakes are our daily bread. But the mission is to manage risk. what was our stop loss? $48K? In this hypothetical scenario, we take a loss of $17K. That is the risk.
Of course, to assume this risk we must consider two things. First, the projected return should be at least double to achieve a good risk/reward ratio. (risk/reward). That is, a ratio of 1:2. Second, our other investments must generate sufficient income to cover that risk. In this way, we are managing the risk so as not to have losses in the portfolio as a whole.
The fanatical narrative of the militants on social networks advises an extremely reckless and irresponsible position. After bombarding the people with mountains of libertarian dogmas and anti-state paraphernalia, the instruction is usually to buy BTC at any price, wait forever, and never sell. According to this narrative, Bitcoin is the panacea. And everything else is garbage. If the price crashes, it doesn’t matter. Wait. BTC is presented as an ark of salvation in the fight against the established power.
The problem is that someone has to put the bread on the table. And you have to take care of your pocket. Not all of us are willing to lose our savings on an ideological crusade. The investor has the right to invest his money with exclusively financial goals. Or not? Investing money for money is not a sin. Pragmatic and non-idiosyncratic investor is forced to manage risk strategically.
Opportunity is closely related to risk. That is to say, the chance of winning is linked to the risk of losingrder. Bitcoin offers many opportunities. But, precisely for this reason, it is known as a risky asset. Obviously, such a volatile asset carries great risk. Otherwise it would be a stable asset. Stability does not give growth. But it gives predictability.
The reduction of uncertainty is the objective of risk management. Opportunities and risks in the context of a diversified and balanced investment portfolio must be weighed against the complex and contradictory relationship between stability and growth.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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